During February, the bond market reacted to a bevy of growth-positive economic releases, ranging from retail sales to personal income to industrial production. Moreover, the new administration's $1.9tn recovery package moved through the House and appeared to make it through the Senate largely intact. At the same time, optimism grew over the rollout of Covid vaccines.
This led to a significant and largely unexpected rise in rates, from the 5-year portion of the yield curve extending through 30 years. Rates rose each week during the month. Short rates performed better, indicative of the view that the Fed is on hold and the economic recovery is driving long rates higher. Convexity hedging by mortgage investors is believed to have added to volatility, as did a very weak auction of seven-year notes. Chairman Powell continued to advocate for an accommodative stance by the Fed.
The benchmark 10-year U.S. Treasury note closed the month at a 1.49% yield, some 41 basis points (bps) above the January close. The 2-year to 30-year curve slope rose 25 bps. Debate continues over inflation expectations. Industrial commodity prices and oil jumped. Still, most of the move in rates this month came in the form of "real yields" (the 10-year TIPS yield rose 29 bps).